Can Actively Managed Stock Portfolios and Efficient Market Theory Co-Exist?
Efficient Market Theory tells us that there are essentially no big opportunities in the stock market at any given point in time, because investors know all relevant information about a company, and that stocks are always priced accordingly.
I find myself shaking my head when I read the words Efficient Market Theory or Efficient Market Hypothesis (EMH), because my experience doesn’t jive with that concept. From my perspective, there are always overpriced and underpriced stocks, and it doesn’t take a rocket scientist to know that a stock that rose 50% since February – Delek (DK) – is due for a fall; and that a company with 50% earnings growth and a P/E of 9.2 – PulteGroup (PHM) – is way overdue to rise. As a matter of fact, most homebuilder and construction aggregate stocks are extremely cheap right now, including Martin Marietta Materials (MLM) in our Growth Portfolio.
Why are Pulte and Martin Marietta shares so cheap and stagnant? Well, the yield on the 10-year U.S. Treasury Note is at a high for 2018, so the bond market is very much dominating financial headlines right now. And when investors think of rising interest rates, they worry that people won’t buy homes because people won’t want to lock in “a high interest rate”. Therefore, investors avoid stocks that are closely or loosely associated with homebuilding.
Those worries are silly. A 30-year fixed rate mortgage is available today with an interest rate of 4.58%. Does that sound high to you? Granted, rates have recently been even lower. The last time a 30-year fixed rate mortgage had a 4.58% interest rate was August 2013. But prior to 2013, mortgage rates were even higher: 5.00% in February 2011, 5.59% in June 2009, 6.52% in July 2008, 8.64% in May 2000 and 9.23% in December 1994. History gets even uglier as you travel further back in time. A 30-year fixed rate mortgage could be had for 18.39% in October 1981! (You can peruse historical mortgage rates on the Freddie Mac home page.)
Tell me again why people are afraid of homebuilder stocks when a 30-year fixed mortgage rate is 4.58%? I personally chalk it up to the news cycle. As soon as the news media fixates on a different aspect of investing, economics or politics, the pressure will be off Pulte, Martin Marietta and their peers, just as we saw the news media move away from the trade war topic in early April, thus removing pressure from steel stocks.
If you believe in Efficient Market Theory, you might as well own mutual funds and divert your energy away from following individual stocks and sectors. Maybe your lawn needs mowing, or there’s a honey-do project waiting for you. But if you believe, like me, that stocks are often seriously mispriced, then join me in searching out capital gain opportunities that can enhance your net worth.
Send questions and comments to Crista@CabotWealth.com.
PORTFOLIO NOTES
Be sure to review the Special Bulletins from April 19 and 20 in which I mentioned news, rating changes and/or price action on Alphabet (GOOGL), BB&T Corp. (BBT), Blackstone Group LP (BX), Comerica (CMA), ConocoPhillips (COP), Morgan Stanley (MS), Skechers (SKX) and Southwest Airlines (LUV).
Quarterly Earnings Release Calendar
April 25, p.m.—Chipotle Mexican Grill (CMG) and Knight-Swift Transportation (KNX) – 1Q
April 26, a.m.—Alexion Pharmaceuticals (ALXN) and Southwest Airlines (LUV) – 1Q
April 27, a.m.—Interpublic Group of Companies (IPG) – 1Q, and WestRock (WRK) – 2Q
April 30, a.m.—Molina Healthcare (MOH) – 1Q
May 1, a.m.—Apple (AAPL) – 2Q
May 3, a.m.—PBF Energy (PBF) – 1Q
May 3, p.m.—Universal Electronics (UEIC) – 1Q
May 7, p.m.—Delek US Holdings (DK) – 1Q
May 10, p.m.—TiVo (TIVO) – 1Q
Virtually all companies offer extensive information on their websites pertaining to their quarterly earnings releases, often including slide shows or webcasts.
Earnings Season Scorecard
Big Earnings Beat: Alphabet (GOOGL), BB&T Corp. (BBT), Baker Hughes, a GE company (BHGE), Bank of America (BAC), Blackstone Group (BX), Morgan Stanley (MS) and PulteGroup (PHM)
Slight Earnings Beat: Comerica (CMA), Schlumberger (SLB) and Skechers (SKX)
Big Earnings Miss: CIT Group (CIT)
Buy-Rated Stocks Most Likely* To Rise More Than 5% Near-Term:
Molina Healthcare (MOH)
*I can review price charts and make an educated determination about what’s likely to occur, but I will sometimes be wrong. I cannot control the stock market; I can only guide you through it.
Today’s Portfolio Changes:
Bank of America (BAC) moves from Strong Buy to Hold.
Delek US Holdings (DK) moves from Strong Buy to Hold.
Last Week’s Portfolio Changes:
Alphabet (GOOGL) moved from Strong Buy to Hold.
ConocoPhillips (COP) was sold from the Growth Portfolio.
Updates on Growth Portfolio Stocks
Alphabet Cl. A (GOOGL) reported first quarter diluted EPS of $13.33 yesterday afternoon, when the market had expected $9.28. Results were enhanced by $3.40 due to “a new accounting standard (ASU 2016-01) that changes the way companies account for equity security investments.” Without the accounting change, Alphabet’s reported earnings handily exceeded the consensus estimate, although many one-time items made the quarter fuzzy for investors to decipher. Quarterly revenue of $31.1 billion beat the consensus estimate of $30.3 billion, and rose 23% in constant currency vs. a year ago. A dozen investment firms changed their price targets on GOOGL today–both up and down–and the vast majority of targets landed within the range of 1,200 – 1,300.
Alphabet is the world’s largest internet company. Revenue is derived from Google’s online ads, with the balance coming from the sale of apps, digital content, services, licensing and hardware. I will consider GOOGL to be fairly valued when it retraces its January high near 1,190, at which point I plan to sell so as to make room for a more undervalued stock to join the portfolio. (Short-term investors who buy below 1,080 can earn a 10% capital gain as the stock returns to 1,190.) Longer-term investors should feel comfortable holding Alphabet, because earnings growth projections currently remain strong through 2020. Hold.
Apple (AAPL – yield 1.5%) manufactures a wide range of popular communication and music devices. Apple is expected to report second quarter EPS of $2.69, within a range of $2.59 to $2.80, on the afternoon of May 1. Morgan Stanley is expecting Apple to report weak second quarter iPhone sales, which could lead to a drop in the share price. The analyst recommends that investors buy on weakness. I concur. As long as full-year earnings estimates remain strong, my outlook for the stock remains bullish, despite any interim volatility.
In conjunction with the announcement of first quarter results, investors are anticipating larger-than-usual increases to the dividend and to the share repurchase authorization due to the benefits of U.S. tax reform. Last year’s dividend increase was 10.5%. One major Wall Street firm is estimating up to a 50% dividend increase.
Apple is an undervalued growth stock that’s expected to see EPS increase 23.9% in fiscal 2018 (September year-end), while the P/E is comparatively low at 14.5. There’s been no statistically significant change in Apple’s consensus earnings estimates over the last four weeks. AAPL has recently traded between 164 and 182. There’s 10% upside within that trading range. I expect additional capital gains in 2018. Buy AAPL now. Strong Buy.
Bank of America (BAC – yield 1.6%) – The company reported a fantastic first quarter last week, and earnings estimates subsequently rose again. Bank of America is expected to achieve EPS growth rates of 39.3% and 13.3% in 2018 and 2019. The corresponding P/Es are 11.9 and 10.5. I’m moving BAC from Strong Buy to Hold. BAC has been trading quietly between 29 and 30.5. I expect the stock to head back to its March high near 33 in the near future. At that point, we’ll have achieved a total return of 39% since BAC joined the Growth Portfolio in June 2017. I might then sell in favor of a smaller financial institution, in order to capitalize on legislative changes that are coming from Congress this year. (BAC will still be a great stock to hold longer-term.) Hold.
CIT Group (CIT – yield 1.2%) operates a bank holding company and a financial holding company that both provide financing, leasing and advisory services to small and middle market businesses, consumer markets and the real estate and railroad industries. This morning CIT Group reported first quarter EPS of $0.74 from continuing operations (excluding noteworthy items) vs. $0.54 a year ago, below analysts’ estimates. The earnings miss was attributed to “a $22 million charge-off of a single commercial exposure and a higher level of reserves primarily within the Commercial Finance division of Commercial Banking.” The common equity tier 1 ratio (CET1) was 14.0%, more than triple the Basel III requirements, and CIT repurchased $195 million of stock during the quarter.
Prior to today’s earnings report, analysts forecast CIT’s full-year EPS to grow 32.2% and 20.0% in 2018 and 2019, and the corresponding P/Es were 13.0 and 10.9. If analysts decrease full year earnings estimates by the amount of today’s $0.22 earnings miss, then the 2018 EPS growth rate will be 25.0%.
Importantly, CIT edged above its trading range yesterday, opened down today on the earnings miss, then immediately bounced back up toward yesterday’s bullish level. It appears that the market plans to shake off the news about CIT’s first quarter charge-off, in which case investors should buy CIT now. I expect CIT to rise to its March high at 56 in the short term, with additional capital gains in 2018. Strong Buy.
Delek US Holdings (DK – yield 1.7%) is a diversified downstream energy company and a very undervalued small-cap stock. The company will announce first quarter results on the afternoon of May 7. Earnings estimates shot upward last week. Analysts now expect EPS to grow 157% and 25% in 2018 and 2019. The corresponding P/Es are quite low at 16.2 and 13.0. DK could appeal to investors who have a focus on value, growth or dividend income.
DK is up 50% from its low point in the ongoing stock market correction, and continues to reach new all-time highs. Because of that, I’m moving DK from Strong Buy to Hold. Interestingly, Deutsche Bank raised its price target on DK yesterday from 46 to 58. However, I’m extremely wary of buying stocks that just ran up rapidly without pausing. I’ll be ready to buy again after the stock pulls back and rests. Traders should use stop-loss orders. Hold.
KLX Inc. (KLXI) is an undervalued, small-cap aggressive growth stock in the aerospace and energy service industries. In late December 2017, KLX announced that it hired Goldman Sachs to represent the company after receiving inquiries from interested parties about possibly buying all or part of KLX. No further news has emerged on the topic. SunTrust Robinson raised their price target on KLXI yesterday, from 78 to 82. KLX is expected to see 2019 EPS grow 34.3% (January year-end). The stock continues to reach new all-time highs, and the price chart is bullish.
Keep in mind that if there is an announcement regarding potential merger or spin-off activity (or lack thereof) that displeases the market, the stock will have a quick sell-off. Protect your downside with a stop-loss order, and don’t look back. There are many fish in the sea. Hold.
Knight-Swift Transportation Holdings (KNX – yield 0.5%) is a truckload carrier formed from the September 2017 merger between Knight Transportation and Swift Transportation Company. The company just completed its seasonally slow first quarter. Knight-Swift Transportation is expected to report first quarter EPS of $0.40, within a range of $0.35 to $0.44, on the afternoon of April 25. The market expects full-year EPS to grow 64.5% and 20.3% in 2018 and 2019. KNX is an undervalued mid-cap stock. KNX rose to new all-time highs this year, then pulled back with the weak market. I will move KNX back to a Buy recommendation when the share price shows more stability. Hold.
Martin Marietta Materials (MLM – yield 0.9%) is a supplier of crushed stone, sand, gravel, cement, concrete and asphalt. CEO Ward Nye spoke with Fortune’s Susie Gharib last week about leadership and integrity. Consensus estimates point to EPS growth of 18.9% and 24.6% in 2018 and 2019. The corresponding P/Es are 23.0 and 18.5, making the stock undervalued based on 2019 numbers. MLM has been resting at price support near 200. Strong Buy.
Molina Healthcare (MOH) is a managed healthcare operator that offers health information management solutions to nearly five million members who receive their care through Medicaid, Medicare, health insurance exchanges and other government-funded programs in fifteen states. Molina Healthcare was featured in the April issue of Cabot Undervalued Stocks Advisor.
The market is currently focused on continued progress with the company’s restructuring goals, which have been pleasing analysts thus far. Molina is expected to report first quarter earnings per share of $0.77 on the morning of April 30, within a range of $0.34 to $1.22. That’s an extremely wide range of earnings estimates. Investors should expect significant share price volatility on April 30.
The consensus earnings estimate for full-year 2018 stood at $2.83 per share back in October, and then rose steadily. Analysts now expect Molina to achieve earnings per share (EPS) of $3.64 and $4.43 in 2018 and 2019. The price chart remains bullish. When MOH reaches 92, I expect it to rest before reaching new all-time highs again in 2018. Strong Buy.
PulteGroup (PHM – yield 1.2%) is a U.S. homebuilder and a very undervalued aggressive growth stock. George Maris, co-head of equities – Americas at Janus Henderson cited Pulte as one of his top stock picks in this CNBC video, saying “Pulte Homes is tremendously underrated. I think the U.S. homebuilders are in phenomenal shape.”
PulteGroup reported first quarter EPS of $0.59 this morning, above all analysts’ estimates. The company achieved strong year-over-year gains in revenue, profit, operating margins, closings, net new orders and backlog, and repurchased $52 million of stock. CEO Ryan Marshall commented, “Robust buyer demand in the face of mortgage and financial market volatility attests to the strong underpinnings of this housing recovery which is being bolstered by sustained economic growth, good job trends, favorable demographics and a limited supply of homes for sale.”
Prior to today’s earnings report, the consensus full-year 2018 EPS projection was $3.09, reflecting 50% year-over-year growth, and the P/E was incredibly low at 9.2. In the coming days, most of the 22 analysts who cover the stock will be raising their earnings estimates and price targets, and some will be raising their ratings as well. Investors can expect that activity to lead to more buying activity in the weeks ahead that pushes the share price up toward the stock’s January high of 35, giving new investors a potential 18% capital gain on the rebound, and additional gains thereafter.
PHM had a false start in early April, and has come back down to its 2018 lows. The stock rose to the top of its trading range this morning on the bullish earnings report. This is probably your last chance to buy PHM at current depressed levels. Buy PHM now. Strong Buy.
Quanta Services (PWR) provides specialized infrastructure and network services to the electric power, oil and natural gas industries. Consensus earnings estimates reflect 29.9% EPS growth in 2018, and the stock is undervalued. PWR has been resting at strong price support near 33.5. In the coming months, I expect PWR to rise to its January high of 40, with additional capital gains in 2018. Patient investors should buy PWR now. Strong Buy.
Southwest Airlines (LUV – yield 0.9%) is the largest U.S. domestic air carrier, transporting over 120 million customers annually to over 100 locations in the U.S., Central America and the Caribbean. Southwest had an in-flight problem last week when an engine blew out on an airplane, causing the death of a passenger. Oddly, this serious news did not attract the typical media circus, nor rate a mention in the most recent industry research report that crossed my desk.
The company is expected to report first quarter EPS of $0.74, within a range of $0.72 to $ 0.83, on the morning of April 26. Analysts expect Southwest’s full-year EPS to grow 38.0% in 2018, and the P/E is just 11.3. The stock is low within its trading range, offering a 20% capital gain when LUV returns to its January high of 66, with additional capital gains in 2018. Patient investors should buy LUV now. Strong Buy.
Updates on Growth & Income Portfolio Stocks
BB&T Corp. (BBT – yield 2.8%) is a 145-year-old financial holding company with $222 billion in assets and 2,100 financial centers that serves businesses and individuals. The recent acquisition of Regions Insurance Group from Regions Financial (RF) expands BB&T’s business reach into Arkansas and Louisiana. In this CNBC video, BB&T CEO Kelly King talks about rising interest rates, tax reform, digital and branch banking, expectations of enhanced business investment activity in the third quarter and JPMorgan Chase’s expansion into Washington D.C.
Earnings estimates have steadily risen for the past four months. Analysts now expect full-year EPS to grow 43.0% and 8.5% in 2018 and 2019. The pace of loan growth in the balance of 2018 will likely be key to BBT’s desirability as a portfolio holding in 2019. I’ll therefore be closely monitoring 2019 earnings estimates, which are currently a little lower than I prefer. The stock could reach short-term price resistance at 56 quite soon. Hold.
Blackstone Group LP (BX—yield 7.7%*) is the world’s largest and most diversified alternative asset manager with $450 billion in client assets. The company raises tens of billions of dollars from investors and deploys the capital into private equity, lower-rated credit instruments, hedge funds and real estate. Diluted economic net income (ENI) of $0.65 in the first quarter dramatically beat the consensus estimate of $0.43. Full-year earnings estimates rose last week. Analysts now expect Blackstone’s economic net income (ENI) to grow 0.7% and 13.8% in 2018 and 2019.
In April, BX came down to its lows from November and December 2017, and now it’s rebounding toward its January high near 36. BX could appeal to dividend investors, growth & income investors, and traders who would be happy with a potential 10% capital gain this year. Buy BX now. Strong Buy.
*The payout varies each quarter, with the total of the last four announced payouts, plus the $0.30 special 2018 distribution, yielding 7.7%.
Comerica (CMA – yield 1.3%) is a financial services company engaged in domestic and international business banking & lending, wealth management and consumer services. The company is in a strong position to capitalize on rising interest rates that contribute to increases in net interest margin (NIM) through its variable rate loan portfolio. Comerica was featured in the April issue of Cabot Undervalued Stocks Advisor.
Full-year consensus earnings estimates rose again last week, with EPS now expected to increase 40.5% and 11.5% in 2018 and 2019. The corresponding P/Es are 14.3 and 12.8. I’ve been awaiting the announcement of Comerica’s late-April annual dividend increase. Watch for a 10% to 20% dividend increase. (A 20% increase is my bullish guess, while the last two increases ranged from 11% to 15%.)
Since reporting first quarter results a week ago, five investment firms adjusted their price targets for CMA within a range of 102 to 109. CMA rose to new all-time highs in January, pulled back with the stock market correction, rose to new highs again in both February and March, then had another pullback. Buy CMA now. Buy.
Commercial Metals Company (CMC – yield 2.2%) is a recycler and manufacturer of steel and metal products, including rebar and fence posts. U.S. industrywide pricing is expected to remain strong due to robust economic activity, lower steel supply and lower import volumes due to tariffs. Wall Street analysts expect EPS to grow 94.4% and 67.4% in 2018 and 2019 (August year-end), with corresponding P/Es of 15.6 and 9.3. The disparity between the earnings growth rates and the P/Es is somewhat absurd. After falling in March, share prices of most steel stocks turned upward in recent weeks. There’s 20% upside as CMC returns to its March high of 26. Strong Buy.
GameStop (GME – yield 11.5%) is a retailer of games, collectibles and technology; with additional ventures in the entertainment field. The company is going through a multi-year shift in product emphasis, to which the stock has reacted poorly. Sell Half.
The Interpublic Group of Companies (IPG – yield 3.5%) is a large conglomerate of advertising, marketing, communications and public relations companies serving all global markets. Interpublic is in a position to benefit from a shift in professional equity portfolios as portfolio managers ponder the resignation of the CEO at WPP, a competitor with less attractive EPS growth than Interpublic and a bearish price chart. Money flowing from WPP to IPG could certainly enhance IPG’s total return potential in 2018.
Interpublic is expected to report first quarter EPS of $0.04, within a range of $0.02 to $0.09, on the morning of April 27. IPG is an undervalued growth & income stock with an attractive rising annual dividend. The company is expected to see full-year 2018 EPS grow 22.0%, though growth is expected to slow to 8.1% in 2019. IPG is approaching its February high at 25. I expect additional capital gains in 2018. Strong Buy.
Morgan Stanley (MS – yield 1.9%) is a major U.S. investment bank and wealth manager, and an undervalued, large-cap growth stock. For a comprehensive review of Morgan Stanley’s first quarter results, read this from Forbes: Morgan Stanley’s Mix Of Volatile And Stable Revenue Streams Remains Underappreciated. Nomura raised their price target on MS last week, from 63 to 66. Analysts are expecting full-year EPS to grow 26.7% in 2018. In the coming months, I expect MS to rise to its March high at 59, with additional capital gains in 2018. Buy MS now. Strong Buy.
Schlumberger (SLB – yield 2.9%) is the world’s largest oilfield service company. Schlumberger reported first quarter EPS of $0.38 last week, when the market was expecting $0.37. Revenue came in on target at $7.8 billion. Three investment firms subsequently adjusted their price targets for SLB within a range of 80 to 82. Schlumberger Chairman and CEO Paal Kibsgaard commented:
“As forecast, our results in the first quarter of 2018 largely reflected transitory factors, with seasonal reductions in activity in the Northern Hemisphere and planned project startup costs including the equipment mobilization, reactivation, and redeployment associated with recent contract wins. The underlying international businesses started the year well, as business units in the Middle East, the North Sea, and Russia were all in line with our first-quarter activity expectations, while activity upsides in Asia were offset by continued weakness in Latin America and Africa. On land in North America, our Drilling services business continued to grow, driven by strong demand for horizontal drilling technologies. Revenue also increased due to the ramp-up of activity in Canada.”
The number of U.S. rigs drilling for crude oil and natural gas rose by five last week to a total of 1,013, up 156 vs. a year ago. Analysts are expecting full-year EPS to grow 44.7% in both 2018 and 2019, with corresponding P/Es of 31.9 and 22.0. The price chart is turning bullish. There’s 16% upside as SLB retraces its January high of 79. Buy SLB now. Strong Buy.
WestRock Company (WRK – yield 2.6%) is a global packaging and container company. WestRock’s acquisition of Kapstone Paper and Packaging is expected to close in the early fall. Both second quarter and full-year consensus earnings estimates continue to rise. WestRock is expected to report second quarter EPS of $0.84, within a range of $0.79 to $0.94, on the morning of April 27. Analysts expect EPS to increase 53.8% and 15.6% in 2018 and 2019. The corresponding P/Es are 16.4 and 14.2. WRK is gradually rising toward its January high at 70. Strong Buy.
Updates on Buy Low Opportunities Portfolio Stocks
Alexion Pharmaceuticals (ALXN) is a biopharmaceutical company that researches and manufactures treatments of severe and rare health disorders. The stock fell on April 20 due to the media’s misinterpretation of patent news coming from Brazil. The court case involves many biopharmaceutical companies regarding the time period involved with mailbox patents. Here is Alexion’s comment:
“Recent media reports have incorrectly stated that the Brazilian Superior Court of Justice has granted a compulsory license of Soliris® (eculizumab). Alexion would like to clarify that no compulsory license of Soliris® was requested or granted in Brazil. [For example, a compulsory license would exist if the Brazilian government allowed another company to produce Soliris, a patented product, without Alexion Pharmaceuticals’ consent.] The recent decision by the court refers to a different legal matter with the Brazilian Patent Office related to a Soliris® mailbox patent that expired in 2015. [The disputed term of the mailbox patent is 20 years from its filing date vs. 10 years from its grant date.] Alexion is evaluating the full decision by the court in this patent case before exploring the options to respond. Alexion continues to have patent applications pending in Brazil that would provide additional protection to Soliris®. Brazil represents a low single digit percentage of Alexion’s worldwide sales. This patent matter has no implications for intellectual property outside of Brazil.”
Importantly, there are no biosimilar products in Brazil that are waiting to take the place of Soliris. So while there might be a temporary patent problem, that does not mean that Soliris can no longer be sold in Brazil, and it does not mean that Soliris is about to lose market share in Brazil.
Alexion is expected to report first quarter EPS of $1.50, within a range of $1.40 to $1.62, on the morning of April 26. Analysts expect full-year 2018 and 2019 EPS to grow 17.1% and 23.5%. The corresponding P/Es are 15.7 and 12.7. In the coming months, I expect ALXN to rebound to its March high of 127, with lots more capital gain potential this year. Patient investors should buy ALXN now. Strong Buy.
Baker Hughes, a GE co. (BHGE – yield 2.1%) offers products, services and digital solutions to the international oil and gas community. As mentioned earlier, the number of U.S. rigs drilling for crude oil and natural gas rose by five last week to a total of 1013, up 156 vs. a year ago.
Baker Hughes reported first quarter adjusted diluted EPS of $0.09 on April 20 when Wall Street was expecting $0.06. Quarterly revenue of $5.4 billion came in on target. Chairman and CEO Lorenzo Simonelli commented, “We made strong progress in the quarter, securing several key commercial wins, executing on our synergy targets and delivering for our customers. I am pleased with our performance on our priorities of growing share, improving margins and generating cash. The gas market continues to grow, and strong LNG demand supports the view that new capacity will be required in the early to mid-part of the next decade. BHGE is uniquely positioned across the oil and gas value chain, and well placed to benefit from the long-term industry trends.” Six Wall Street firms subsequently raised their price targets on BHGE yesterday to a range of 31 to 41.
Wall Street expects full-year EPS to grow 79% and 100% in 2018 and 2019. The corresponding P/Es are 44.1 and 22.1. BHGE is racing toward short-term price resistance at 37. If you were in the stock for a quick trade, you’ll want to sell when it passes 36. Everybody else should hold BHGE, and consider buying more shares on the next pullback. Strong Buy.
Chipotle Mexican Grill (CMG) is a growing restaurant chain, and an aggressive growth stock. Chipotle is expected to report first quarter EPS of $1.56, within a range of $1.21 to $1.98, on the afternoon of April 25. Analysts expect full-year EPS to grow 28% in 2018 and again in 2019. CMG surpassed upside price resistance at 345 last week, then came back down. We’re probably going to see a near-term run-up. If you own CMG, I recommend that you hold your shares, and consider using a stop-loss order to protect your downside. The stock seems fully valued to me, so I won’t be giving it a Buy recommendation. Hold.
PBF Energy Inc. (PBF – yield 3.2%) is one of the largest U.S.-based petroleum refining and marketing companies. PBF serves the U.S., Canada and other international locales. PBF is expected to report first quarter earnings per share of (-$0.11) on the morning of May 3, within a range of (-$0.40) to $0.32. Wall Street expects aggressive full-year EPS growth rates of 158% and 34.7% in 2018 and 2019. The corresponding P/Es are very low at 13.0 and 9.6. One major Wall Street bank gives PBF a sum-of-the-parts valuation of $52. PBF rose to new all-time highs last week. The stock could easily keep climbing, or pull back to rest in the mid-30s. Buy PBF now and buy more on pullbacks. Strong Buy.
Skechers USA Inc. (SKX) is an apparel company that designs and manufactures affordable footwear for people of all ages. The company is based in California, and sells its products in over 160 countries and territories in Asia, Europe, the Middle East and the Americas, through wholesale, retail and e-commerce venues. Skechers USA was featured in the April issue of Cabot Undervalued Stocks Advisor.
The company reported a strong first quarter last week, in conjunction with an announcement of some second quarter shipments being pushed into the third quarter, which is traditionally a very strong quarter for Skechers. The stock reacted violently to the news, and will now likely remain low for several months while the stock catches its breath and rests.
Revised full-year earnings per share are expected to grow aggressively at 20.8% and 18.1% in 2018 and 2019. Corresponding P/Es are 13.7 and 11.6. SKX is an undervalued mid-cap growth stock. I encourage investors to hold SKX, and consider buying more shares while the price is depressed. Strong Buy.
Supernus Pharmaceuticals (SUPN) focuses on the development and commercialization of products for the treatment of central nervous system diseases and psychiatric disorders, including epilepsy and ADHD. Analysts expect EPS to grow 47.6% in 2018, with continued aggressive growth in subsequent years. SUPN is rapidly approaching 50, where it last traded in September. Hold SUPN for additional capital gains, because it’s still a very undervalued aggressive growth stock. Optimally, buy on pullbacks to 46. Buy.
TiVo (TIVO – yield 4.9%) is an entertainment technology company that joined the Buy Low Opportunities Portfolio specifically because it’s a takeover target. (See the Special Bulletin from March 5.) TiVo will report first quarter results on the afternoon of May 10. I expect patient investors to be rewarded with capital gains in 2018, either from a buyout offer or from price increases related to the current low valuation. Expect volatility. Strong Buy.
Universal Electronics (UEIC) is a manufacturer and cutting-edge world leader of wireless remote control products, software and audio-video accessories for the smart home, and it has a strong pipeline of new products. The company is expected to report first quarter EPS of $0.64 on the afternoon of May 3, within a range of $0.60 to $0.66. UEIC is an undervalued micro-cap growth stock, with minimal debt on the balance sheet. Analysts expect full-year EPS to grow 21.7% and 20.8% in 2018, with corresponding P/Es of 14.4 and 11.9. Keep in mind that small, financially-strong companies make attractive takeover targets. I expect UEIC to rebound to 66, where it last traded in October 2017. Strong Buy.
